insights
As the first quarter of 2023 unfolds, Momentus Capital team members are starting to see trends for an exciting year ahead. And while 2022 proved to be another rollercoaster ride for the economy and small businesses, our experts still forecast plenty of opportunities to make 2023 a groundbreaking year in mission-based lending.
In this year’s predictions, we take a deep dive into a wide range of topics, including how communities can lead the way to greater economic prosperity, how we can get more capital into the hands of small businesses, and potential legislative changes on the horizon. Ultimately, we remain focused on how these factors could impact our borrowers, partners, investors, and the communities we serve. This valuable foresight serves as a compass for existing entrepreneurs and those embarking on their ventures.
Please take a look at these perspectives on how we can create equitable access to capital and accelerate underserved communities toward success in 2023.
Advocacy: Support of LMI Neighborhoods Most Affected by Climate Change Will Increase
By Robert Villarreal, Chief External Affairs Officer
In a divided government, legislation introducing innovation or new ideas takes time and effort. Here are a few issues we will be tracking and hope to influence.
The Greenhouse Gas Reduction Fund is an initiative of our federal government to reduce greenhouse gas emissions and our carbon footprint. It is a $27 billion program, with
dollars focused on low-to-moderate income (LMI) communities. Through intense efforts and groundwork, our industry will be responsive and receive much of the allocation, supporting LMI neighborhoods most impacted by climate change.
Second, the SBA will announce new programs or tweak current ones, supporting efforts to supply greater capital to people of color and underestimated communities.
Similar to last year, we will be asked to play a role in developing or improving these programs, and they will provide a platform for Momentus Capital and others to increase lending into underestimated communities.
Impact Investments: Renewed Commitment Despite Reduced Market Focus on Diversity and Inclusion
By Raymond Guthrie, Chief Investment Officer, Head of Capital Deployment
I expect 2023 will be a year of continued challenges for diverse entrepreneurs to access capital. Just a year removed from when venture capital firms, banks, and corporations were making grand proclamations in support of diverse entrepreneurs and fund managers, 2022 saw that black founders still only raised 1 percent of all VC funds. Put another way, black entrepreneurs raised less money in 2022 than in 2021, thus regressing to pre-George Floyd times.
With the current expectations within the business community that there will be an economic slowdown and the recent trend of pulling back the focus on diversity and inclusion at many corporations, all coupled with the challenges within the banking industry, access to capital for diverse entrepreneurs will likely be reduced and even more challenging to access in 2023.
I see this pullback from diverse entrepreneurs as an opportunity for Momentus Capital. We are fully committed to supporting diverse entrepreneurs and developers. Over the last five years, we have lent or invested nearly $1 billion to diverse entrepreneurs and developers, and we are committed to doing even more in the next decade. For example, our partnership with Macy’s is focused on investing and lending over $200 million to diverse suppliers in the next five years. Our investment business line is focused on supporting diverse-led businesses with the growth capital they need to reach new heights, and our Momentus Capital branded family of companies is designed to support diverse businesses and developers with the right capital to help them revitalize their communities and create inter-generational wealth.
So as the institutions that have historically overlooked and underestimated diverse entrepreneurs and communities pull back, we are leaning in and will demonstrate to them the massive opportunity they are missing to create impact and sustainable returns by supporting diverse enterprises and communities.
Credit Risk: We Will See Increased Demand for Flexible Capital from CDFI
By Masouda Omar, Head of Small Business & Community Development Credit
This year will mirror the rapid pace of 2022 for community development and affordable housing, particularly around managing increased operating costs, volatility in construction costs, higher interest rates, shortages of labor, and the impact of inflation. Small businesses are facing barriers in accessing loan capital; they are experiencing higher operating costs; and are having to compete for talent. Proactive engagement in portfolio management will be necessary to address credit quality and manage loan delinquencies by engaging in early conversations with borrowers.
Refinancing existing loans may result in financing gaps being filled due to higher interest rates and increased scrutiny during underwriting. This means CDFIs will also see an increased demand for more flexible capital as traditional underwriting criteria become more stringent. Whether a recession is ultimately in the picture for 2023 or not, it is wise to use these uncertainties and early warning signs as an opportunity to push forward in driving impactful community outcomes.
National Programs: Opportunities to Spur Growth for Underserved Communities Continue
By Jeff Mosley, Equitable Development Initiative National Lead
As the nation – and underserved communities in particular – continue to recover from the pandemic and economic uncertainty, many of our 2022 predictions still ring true: increase in development/construction activity will be somewhat subject to different factors:
These are likely to impact real estate developers of color, in particular, who tend to have less “friends and family” equity or access to capital to call on in these periods. For 2023, we will see these trends continue, but there are opportunities to spur growth or focus attention on underserved communities:
Fundraising: A Decline in Commitment to Racial Equity
By Tameka Porte, Director of Development
Since the senseless killing of George Floyd in 2020, many financial institutions and corporations have made substantial commitments to racial equity and the organizations that support that work. This was compounded by the ongoing pandemic and how it greatly impacted communities of color. Unfortunately, fundraising is prone to trends, and though racial equity is now a strategic pillar at many foundations and financial institutions, in 2023, I think mission-driven organizations will start to see these commitments subside.
We have already seen institutions return to their historical strategic pillars and make significant commitments around climate and education without a racial equity lens. This, combined with layoffs across sectors, leads me to believe we will see a decline in private fundraising this year, either through reduced gifts or priority shifts. However, as the market transitions away from racial equity trends, we will see which institutions remain committed to this work, and mission-driven organizations can build deeper connections with them to achieve our goals.
Marketing: ChatGPT Can Support Businesses’ Marketing Efforts
By Jason Anderson, Senior Director, Marketing, Communications, and Brand
Most of us have heard the um, chatter around ChatGPT (Generative Pre-trained Transformer). This new artificial intelligence tool uses machine learning to generate text that mimics natural language, creating new opportunities for organizations and small businesses. For example, blogs are great for engaging customers and supporting SEO optimization. But they can be time-consuming.
Using ChatGPT to research topics relevant to your business, smaller organizations and companies can work with the platform to help write blog posts directed toward a specific audience and use a specific tone of voice.
Similarly, ChatGPT can write website copy, marketing emails, product descriptions, and social media posts. But beware, it’s still a computer. It’s important to review the content to be sure it’s accurate, it’s how you want to message your customer, and it isn’t a copy of the same content others may have created using the same tool. For those with more technical abilities, there are opportunities to create a “chatbot” to interact with your customers on your website and support lead generation.
As more people use this new system, the more powerful it will become, creating numerous ways to support small business communications.
Small Business Lending: Continues to be the ‘Backbone of Our Economy’
By Shelli Hayman, Senior Vice President, Small Business Lending
In 2023, small businesses must remain adaptive and creative in an ever-fluctuating market. The heavy influx of cash throughout the pandemic will continue to wane, and while inflation is starting to fall, interest rates are still projected to increase, and staffing challenges will remain. As a result, small businesses should monitor trends that impact their business – directly or indirectly – revisiting marketing efforts and tech innovations to ensure that they are tapping into things that could positively impact their business operations, to promote maximum efficiency.
Overall, I am optimistic about small business in 2023. The best thing any small business owner can do is focus on the elements of business ownership within their control. Maneuvering through economic ups and downs is nothing new to the small business landscape, and they will continue to be the backbone of our economy.
SBA 504 Commercial Real Estate Lending: CDCs Will Work With SBA in Streamlining Requirements for 504 Loans
By Tony Barengo, Head of Commercial Real Estate
This year, the SBA streamlines affiliation and refinance rules for 504 loans. The affiliation rules have long been complex and difficult to interpret. However, that will likely change with the release of the newest Standard Operating Procedure (SOP). As a result, affiliation will be based on ownership percentages and the industry of each entity. This will result in fewer entities affiliated with SBA applicants and reduce processing times and application documentation.
Similarly, many of the refinance requirements could be more convenient and add more in the way of risk mitigation. In concert with the industry’s trade association, CDCs nationwide are working with SBA to streamline the requirements without adding more risk. This would be a big win for many borrowers with floating-rate loans that are either unable to qualify or are currently subject to a complex application process. And more fixed-rate financing means more predictability for our borrowers.
Small Business Lending: We Will Continue to Learn From the Communities We Serve
By Nimaj Driscoll, Loan Expert
This [2023] is a year of progress in our impact and ability to serve underestimated communities. Last year, we made incredible strides in helping small business owners of color access capital through our Activate Detroit loan. Working on the front line with our community partners, small business owners, and other CDFIs in Detroit, I am confident that our efforts are welcome in our ecosystem here and will continue to provide impact.
The key for us to become more effective in achieving our mission is to continue to learn from the communities we serve, stay flexible so that we’re in a position to meet people where they are, and remain an innovator in that space.
I look forward to seeing us continue to work together as an organization and use our combined expertise to help communities reach higher heights.